Recro Pharma, Inc. (NASDAQ:REPH) Q3 2018 Results - Earnings Call Transcript November 7, 2018 8:00 AM ET
Natalie Wildenradt - IR
Geraldine Henwood - President and CEO
Ryan Lake - CFO
Leland Gershell - Oppenheimer & Co
Scott Henry - Roth Capital
Kenneth Trbovich - Janney
Patrick Trucchio - Berenberg Capital Market
Good day, ladies and gentlemen, and welcome to the Recro Pharma Third Quarter 2018 Conference Call. At this time, all participants are in a listen-only mode. Later, we'll conduct a question-and-answer session and instructions will be given at that time. [Operator Instructions]. As a reminder, this call is being recorded.
I would now like to turn the call over to Natalie Wildenradt. You may begin.
Good morning, and thank you for joining us on today's conference call to discuss Recro's third quarter 2018 financial results. This is Natalie Wildenradt, and I am joined today by Gerri Henwood, President and Chief Executive Officer; and Ryan Lake, Chief Financial Officer.
Following prepared remarks today by Gerri and Ryan, we will open the call up for questions. Earlier this morning, we issued a press release, detailing our financial and operating results for the three months ended September 30, 2018. The press release is available on the News & Investors page of our website at recropharma.com.
Before we begin our formal comments, I'll remind you that various remarks we make today constitute forward-looking statements pursuant to the safe harbor provision of the Private Securities Litigation Reform Act of 1995 including statements related to our financial outlook; our ability to raise capital in terms acceptable to us; our ability to resolve the Complete Response Letter issued by the US Food and Drug Administration on our New Drug Application for IV meloxicam and the timeframe associated with such resolution and our product development plans for other product candidates, including the results and timing of any future preclinical studies and clinical trials for such product candidates. These forward-looking statements are subject to risks and uncertainties that may cause actual results to differ materially from our expectations and forecasts, and can be identified by words such as expect, plan, will, may, anticipate, believe, estimate, upcoming, should, intend and other words of similar meaning.
Any such forward-looking statements are not guarantees of future performance and involve certain risks and uncertainties. These risks are described in the Risk Factors in the Management's Discussion and Analysis of Financial Condition and Results of Operations sections of Recro Pharma's annual report on Form 10-K for the fiscal year ended December 31, 2017, and any quarterly reports on Form 10-Q which are on file with the Securities and Exchange Commission and available on the SEC's website.
Any information we provide on this conference call is provided only as of the day of this call, November 7, 2018, and we undertake no obligation to update any forward-looking statements we may make on this call on account of new information, future events or otherwise. In addition, any unaudited or pro forma financial information that may be provided as preliminary and does not purport to project financial positions or operating results of the company. Actual results may differ materially.
We may also discuss certain non-cash financial measures with respect to our financial performance for the nine months ended September 30, 2018 and estimates for the full year ending December 31, 2018. Specifically, we may discuss the earnings before interest, taxes, depreciation and amortization or EBITDA for our contract development and manufacturing organization or CDMO business.
We believe that these non-GAAP financial measures are helpful in understanding our CDMO business as it gives investors greater transparency into the supplemental information used by management in evaluating the financial performance of our CDMO business. This non-cash financial measure should be considered in addition to, but not as a substitute for, reported GAAP results included in our earnings release and to be discussed on this call.
We have included a reconciliation of EBITDA to GAAP measures in a supplemental financial schedule, which has been made available on the News & Investors page of our website at recropharma.com.
In addition, on this call, we will include references to IV meloxicam, an investigational product. Use of IV meloxicam has not been approved by the FDA. The safety and efficacy of the investigational use of IV meloxicam has not been determined. There is no guarantee that IV meloxicam will be approved for marketing by any regulatory agency.
I would now like to turn the call over to Gerri Henwood. Gerri?
Thanks, Natalie, and thank you all for joining us this morning. The third quarter of 2018 has been a productive and focus period for Recro. As many of you know, in October, we announced resubmission of the IV meloxicam NDA to FDA and their issuance of a PDUFA goal date of March 24, 2019. I want to thank the team for their hard work in submitting the NDA so quickly. We believe IV meloxicam has the potential for approval for the management of moderate to severe pain.
Our recent efforts have centered on refining our commercial plan, and pre-commercial manufacturing in advances of potential launch of IV meloxicam in the first half of 2019. We believe IV meloxicam as a novel non-opioid candidate has the potential to play a meaningful and differentiated role in the management of moderate to severe pain and our pre-launch planning is focused on ensuring physician and patient adoption upon approval. We remain confident in IV meloxicam's profile and we look forward to providing an update in the first quarter of 2019.
Also in Q3, our Gainesville CDMO division has exceeded expectations, generating $18.3 million in revenue for the third quarter of 2018. Given the third quarter results, we have raised our 2018 full year CDMO revenue guidance to $75 million. Before turning the call to Ryan Lake, our Chief Financial Officer, I’d like to quickly touch on the opening of the additional 24,000 square-foot GMP development and high potency product services facility which we announced last month.
The new site, which is near our existing 97,000 square-foot DEA-licensed CDMO facility, houses expanded development space focused on creating unique oral dosage forms and solving formulation, process and analytical issues as well as providing additional capacity for clinical trial supply manufacturing and related services. The expanded facility also has specialized space dedicated to development of and GMP manufacturing for high potency products. We believe these additional facilities and capabilities will allow us to provide a broader range of high-quality services to new clients and partners as well as to our existing customers.
I'll now turn the call over to Ryan to discuss our financial highlights. Ryan?
Thanks, Gerri. Good morning, everyone. Since we issued a press release and our Form 10-Q earlier this morning outlining our full financial results, I'll just review some of the key third quarter highlights. As of September 30, 2018 we had cash and cash equivalents of $37 million. Our contract development and manufacturing division continued to exceed expectations as Gerri mentioned during the third quarter, generating revenues of $18.3 million compared to $17.1 million for the third quarter of 2017. The increase in revenue was primarily due to increased profit sharing revenue, and increase in product sales. Cost of sales were $8.5 million and $6.9 million for the three months ended September 30, 2018 and 2017, respectively. The increase is primarily due to the increase in product sales for the periods.
Research and development expenses for the third quarter of 2018 were $11.3 million compared to $9.3 million for the third quarter 2017. The increase of $2 million was primarily due to an increase in pre-commercialization manufacturing costs for IV meloxicam, which had to be charged to research and development expense pre-approval, and an increase in development costs for our other pipeline products. These increases were partially offset by a decrease in NDA costs as the three months ended September 30, 2017 included our NDA filing fee for IV meloxicam.
General and administrative expenses for the third quarter o 2018 were $7 million compared to $6.6 million for the third quarter of 2017. The increase of $0.4 million was primarily due to business development costs in our CDMO segment and professional costs associated with addressing the CRL.
As Gerri mentioned earlier, we are excited to announce that we’re increasing our 2018 CDMO guidance and believe we will generate approximately $75 million in revenue taking into consideration existing contracts and timing of customer order patterns as well as our experience with customer’s product market estimations.
We continue to be encouraged by our CDMO business development activities and with the expansion of our facility and capacity we believe we are well-positioned to continue to build our business in 2019.
I will now turn the call back to Gerri for closing comments. Gerri?
Thank you, Ryan. We’re encouraged by the strong continued performance of our CDMO division, and we remain committed to maintaining this high level of execution, particularly as we integrate our new expanded facility.
Looking forward, the next six months represent potentially transformative period for Recro. We’ve maintained the commitment to realizing IV meloxicam’s potential as a novel non-opioid product for the management of moderate to severe pain. With the recent submission -- resubmission of the NDA and the PDUFA date set for March 24, 2019, we believe we’ve taken meaningful steps towards achieving this goal. Our current focus is preparing for launch if approved ensuring the full potential this candidate can be realized.
Importantly while IV meloxicam is our lead program in Acute Care division as additional therapeutic candidate, we continue to advance our novel anesthetic neuromuscular blocking and reversal agent. And this year, we’ve progressed preclinical and manufacturing activities to support the next step in Phase I study for each of the two NMB agents in the first half of 2019. We believe these agents represent incremental value drivers within our Acute Care pipeline, with the potential to enhance both induction of anesthesia and recovery from neuromuscular blockade. And we look forward to providing more updates on this program in the future.
We are encouraged by the collective progress across both company divisions and I would like to thank the entire Recro team for their efforts and commitment and our shareholders for their continued support.
I'd now like to open the call for questions. Operator?
[Operator Instructions]. Our first question comes from David Amsellem of Piper Jaffray. Your line is now open.
This is [Nicki Hermann] on for David. Good morning. Thanks for taking the questions. With the recent changes in the reimbursement landscape, namely the unbundling of EXPAREL in ambulatory surgical setting, what are your thoughts on the potential for additional CMS changes such as separate reimbursement in the outpatient setting? And as a follow-up to that, can you guys walk us through how you’re thinking about reimbursement specifically for IV meloxicam and specifically your strategy for driving buying from hospital and CMS committees?
Sure. So as you may know from what we’ve disclosed in the past, we had hired a group of key account managers to deal with IVMs in the large system and that team was kept intact after the CRL letter and have continued to work to have formulary discussions under the aegis of the changed regulations allow for those kinds of discussions. We believe that will help us to move forward with formulary approval, it’s not going to be instant but we think the combination of the applicability of meloxicam in the outpatient setting as well as the inpatient setting will be attractive to us in terms of getting some early start. Ambulatory surgical centers as many of you know are not as heavily bureaucratic as would need to be hospitals or they are affiliated outpatient surgery centers. And so it's possible to get on formulary faster and get trial usage. That's important because many of the surgeons who do surgery at ambulatory surgical centers are high volume individuals that often can’t get quite enough operating time or the economics as not as favorable in a hospital setting. So having them have the opportunity to try the product and we believe be reinforced by this product and its efficacy and tolerability, we think that will help in the influencing of hospital formulary committees, and alike.
With respect to specifics for reimbursement, we do believe that we will as other products have into a pass-through status for the first three years and by which time we would expect that more permanent situation would have evolved in terms of J-codes, and permanent codes that could be used. We believe there is a possibility that in the ASCs we would enjoy permanent pass-through status, but there's still some clarification of the interpretation about legislation, and we are hopeful that with the election now passed that as we get into ‘19 perhaps Congress will turn on new trend, which I think is a topic that can unite both sides of the aisle, they will turn to addressing possibilities for the affiliated outpatient hospital surgical centers that has such a future as well. Did I cover your question, [Nicki]?
Our next question comes from Leland Gershell of Oppenheimer & Co. Your line is open.
First question just on the CDMO side, I know you're not giving guidance quite yet for next year, but perhaps you could speak a bit qualitatively about the benefits you may see from a business perspective with the new facility in terms of contracts or any new business you may be generating from that new facility?
Sure. So we have been very happy with how the business has performed this year. And while new business contributes to it, also this solid business that we have had from our numerous customers, has been a big part of that. And based on their current forecast, we would be optimistic about 2019, having the opportunity to grow off of these kinds of numbers. We believe that we will continue to sell new businesses of robust proposal volume and we have been getting reasonable conversions. So we would expect that between both sides of the business, there would be solid opportunity for growth in 2019.
Okay, great. And then one question on the pipeline with the NMB agent setting into the clinic next year, are you able to give us any further color in terms of timeline when we might see initial data presumably, be it will be Phase I safety studies, could we see data toward the end of the year or not if it’s some time?
So, good question. So the first program that will be clinically initiated is likely to be the RP1000 program and that program has already been in human subjects previously, this would be a further dose escalation study when Cornell had done the earlier studies they had hit a threshold, where they didn't have additional COX to support taking the dose higher. We have since done those COX studies and believe that we will have the opportunity to dose escalate so that we can look at getting to the multiples of the dose that anesthesiologists with one I know they had a margin for further use. If that trial is able to initiate on time which right now we've no reason to believe that it won’t be, we should see data certainly before the end of the year. These studies pretty much don’t allow you to do more than a certain number of subjects in a week because of restrictions on available ward time which you have to have so that you have all the recap-citation equipment available as you’re doing those. The RP2000 compound it would be the first in-man study and it is quite possible that that will be taking place in Europe but again we would expect to have that data before the end of the year.
Our next question comes from Scott Henry of Roth Capital. Your line is open.
I will start with just a couple of modeling questions. It looks like a gross margins were pretty strong in Q3, even with revenues, down from 2Q. How should we think about gross margins for the CDMO business given this particularly strong quarter, although it does seem Q3 has been strong historically?
Thanks, Scott. So right now we are anticipating our gross margins to be consistent with the prior year in the mid-40s range. Certainly as we continue to reprioritize and refocus and redeploy our efforts on our business development activities in Gainesville, I think it's really appropriate to really look at that business more on an operating margin business rather than on a gross margin business just by the nature of how those costs are incurred by that plan. Essentially all of the operating costs for that plan are focused on revenue generating activity. So it's really more appropriate to look at it as an overall kind of whether it’s EBITDA or operating margin basis rather than on individual gross margin basis as we start to prioritize and redeploy efforts on some of these new business development opportunities.
Okay, great. And then looking at G&A, about how much of that was preselling expenses? I’m just trying to get an idea of what the G&A annual rate is once product is being sold, to kind of get an idea of what the base number is?
I think if you were to look at the second quarter G&A amount, keep in mind in the first half of the year, we had some significant G&A spending as we were preparing for the pre-commercialization, marketing and launch efforts. You saw that drop dramatically through cost efficiencies and us being very prudent with our expenses in the second quarter drop, I would say the pre-commercial activities drop by about $5 million of the roughly $6 million drop. Certainly as we look out for the rest of this year, I think maybe the fourth quarter would be consistent with the fourth quarter of 2017. But as we start to ramp back up for the potential launch of meloxicam, it would be reasonable to expect that those costs would increase again.
Okay. Great. And then kind of modeling question, the change in contingent consideration continues to bounce around, how should we kind of think about that going forward?
I will let Ryan answer that officially.
So as you look at the current quarter, it was about $4 million increase in the contingent consideration line which was principally driven just by a change in the time, value, money in terms of our modeling. And as you’ll recall, last quarter two things happened that we needed to take into account into our modeling. One was the CRL, but the other was the expansion of the IP for the patents, including the Orange-Book listable patents that we announced in May of 2018. So, kind of both of those factors played into the contingent consideration calculation and it's somewhat as we continue to get closer to the PDUFA date and launch we’re taking into account the time, value and money. So the $4 million increase was solely related to that for this quarter. As we think about the $45 million milestone payment to ALKS, we would expect upon approval that the short-term portion of contingent consideration, which is currently on the balance sheet a little over $30 million would approach or start to equate to about $45 million. So it's possible that you would see in the first quarter of next year a $12 million to $15 million increase in our contingent consideration but again that’s non-cash charge to the P&L.
Okay. Great. And then just quickly on the pipeline. I had in my pipeline sheet this Phase IIIB colorectal orthopedic trial for IV meloxicam. Is that still on track or how should we be thinking about that trial, I’m not sure how that changed with the recent developments?
Yes. Good question, and there are two trials. One of them is a total knee replacement trial, that’s the orthopedic one and other one is bowel resection trial. And those trials are still ongoing. We had gotten approval back in May. We would have taken certain steps such as we’ve taken during development to increase the number of centers and put sort of full-court press on and that would have cost us more money. So obviously in a cash conservation mode, we did not take these steps. We’ve continued to work with centers that we were working with and they do continue to enroll but the pace is slower. We believe that it would still even at this pace allow us to have data from those studies in-hand some time in the mid year timeframe to early second half of 2019 and we still have some levers that we could pull to accelerate it if we needed to. But at this point in time, it doesn't make sense I don't think to escalate the spend associated with those trials.
Our next question comes from Ken Trbovich of Janney. Your line is now open.
Just curious I guess first on the $2 million in pre-commercialization costs associated with building IV meloxicam at commercial scale. I guess the question pertains to utilization. Can you remind us what the dating of the shelf like is and I’m assuming this product would be salable post approval?
So it is our assumption that the product that’s being built would be commercial supply but it has to get charged to R&D in advance of approval because there is no alternative use for it at this moment in time. And Ken the dating remains to be seen upon approval. We have -- we believe that we will see somewhere between 30 months and 48 months as the dating that we will have for the product. But some of that depends on the degree of conservatism with which FDA interprets the information on the extractables and leachables which we gave to them. The most conservative we believe will be 30 months and otherwise we have very strong support for the product stability through 48 months.
Got it. And then just from an accounting treatment just to make sure I fully understand Ryan's comments earlier. Ryan, when you talk about the idea that the contingent consideration would approach the value of the $45 million milestone. That suggests then that we’re not going to see at all the sort of one-time hit on R&D if that's already been accounted for in the contingent liability in the prior quarters or the preceding quarters?
Yes. When you pay that $45 million it will come off the balance sheet, it won't go through the P&L.
Not be in the P&L.
That's right. That contingent consideration is in a separate line too on the P&L, not within R&D.
Okay. And is there anything unique about the treatment of the ongoing royalties or milestones that we need to keep in mind from a commercialization standpoint for those payments, future payments that will be due to Alkermes. Is it just the milestone as we had treated that way or will there also be some component of the royalties that’s treated that way as well?
Yes. Before I let Ryan to the technical answer, this is so why I hate contingent consideration, because while I respectfully acknowledge the public accounting implication, it just thinks why it’s much more difficult, but Ryan would you talk about …?
Right it’s not real until it’s really -- until we understand, Gerri.
Yes. So with the royalties and keep in mind there are some sales-based milestones as well that will continue to still be evaluated from a contingent consideration line. We’re still working through the final accounting treatment on how we will kind of push those costs through the P&L. So to be determined but yes, the contingent consideration line will continue on and there will be a short-term portion that’s representative of not only the -- perhaps the royalties but the sales-based milestones as well and the likelihood of achieving.
And then last question for Gerri just on the recent Ad Coms and the outcomes for [Flora], Seradin and DSUVIA anything at all. I mean these are opioid-based products. I am sort of reluctant you can bring it up but anything at all that can be taken from that?
Oh! That’s just a great opportunity for me to put my thought in my method. I’m going to try. And I think the frustration to those of us who would are just observers and not in the midst of the play, was some degree of hard for us to understand some of the decision making at the agency, especially given Dr. Gottlieb’s PR around the approval of the AcelRX product. It’s just very hard to understand. I mean we’re in an environment where approximately 70,000 people die every year from an opioid overdose, and we have an opioid that is many multiple percentage of potency and we are justifying on the basis of data further usage but not restricting it to that and we’re looking at more destiny for opioid overdose in individuals who died during the entire Vietnam War. And that's happening in more near. And I just fully don’t understand that.
Our next question comes from Patrick Trucchio of Berenberg Capital Market. Your line is open.
I have a couple of questions. I guess first just on the resubmission. Can you tell us what data or what change in the presentation of data did you provide FDA that made to decide additional clinical studies are not necessary to resubmit the NDA? And can you also tell us what you resubmitted NDA did to address the CMC related questions on extractable and leachable data?
Sure within time constraints, yes, in the Type A meeting that we had with FDA where a variety of approaches and options were discussed. The agency indicated their willingness to consider whether language could resolve their concerns in the areas of onset of action and the diminution of action at the end of dosing for some patients. So based on that we had reconfigured the labeling around dosage administration and provided data that was already within the four corners of the NDA but in a couple -- more than a couple, but updated table format to make it easier for the agency we hope to see across studies consistency of results time of onset, time of offset et cetera. So we believe that the data does support what we have put in the labeling and that it is responsive to the concerns that have been raised by the division around that. We will obviously wait for the feedback on that. But we believe that this isn’t pretty in decent shape. With respect to the extractables and leachables so the issue raised by the agency was raised by a non-clinical reviewer looking at an HPLC and seeing very small peaks that were below the International Conference for Harmonization levels at which one would qualify such substances. And asking the question, could any of those small peaks have represented extractable or leachable items? There have been extensive extractable and leachable studies performed by Alliant further performed by Alchemy as part of the NDA submission and based on that we did not believe that this was wanted because you really had to get a forced degradation to get any kind of an extractable very unusual conditions with massive changes in pH and things like that. Nevertheless, we worked with a group that is best known for doing investigations into these types of issues who evaluated these peaks provided data back to us, which was included in the NDA that asserts the peaks, little peaks could not contain an extractable or leachable. Nevertheless, in an abundance of caution and the desire to show the agency our willingness to continue to be comprehensive, we will continue to surveil for these agents when we do our routine testing for the next period of time and until we get further feedback from them. So we don't believe that there were any extractables or leachables in those tiny peaks so we’re seeing the data that we’ve generated does not provide any evidence that they could be extractables or leachables but we will nevertheless continue to surveil for them. And all of that information was included in the resubmitted NDA.
That’s helpful. I guess just to look ahead of it, assuming that you've addressed the agencies concerns and they approve the resubmission, how should we think about the various codes, the various reimbursement codes. The J-code, the C-code submission, are these codes vital for the launch or are they helpful to have once we anticipate dedicated or permanent codes and how should we think about these codes in relation to the ramp in the launch in second quarter through fourth quarter of next year?
We believe that a decent portion of the usage that we will get during 2019 will come starting with the ASCs and then some early adopting or non-restrictive formulary committee hospitals and there our reimbursement team has worked to develop what will be temporary codes but they can be dedicated codes fairly quickly after approval. We will also likely file for a J-code reimbursement before the end of this calendar year that does require that we receive approval before -- I think it's before the end of May of 2019 in order for that code to be able to become effective in January of ‘20, so that would that would be a more permanent codes. In the meantime there will be a temporary codes for inpatients. And the team on the reimbursement side as well as our key account managers have worked closely with formulary committees to understand what processing issues they may encounter. We think the ASCs will have more of that because they are not as often billing on pass-through as perhaps the hospital outpatient department might be used to for certain things. So we will be working with an outside group so that we don’t have to handle any patient specific information. They will be able to be available to answer questions and help any of the folks through the reimbursement process that require additional information.
That’s helpful. And just a last one here. What what's the status of the IV opioid and IV bupivacaine shortages, when are these shortage is expected to ease? Should we anticipate perhaps a stronger ramp up of IV meloxicam in the wake of these continued shortages of these IV treatments in 2019 or beyond or is that may be not the right way to think about it?
Well if I look at things like the OFIRMEV IV Tylenol usage, I would say, and from what we hear from hospitals on a continuing basis they continue to have shortages of injectable opioid products. We don't have any specific information on when that may resolve. I would imagine that some of these manufacturers are looking at some other sites, because our understanding has been Hurricane Maria had taken out some capacity in Puerto Rico that has not been replaced yet and I would wonder whether or not these plants will be able to be reconstructed given that because of water damage they may have other contaminants in them. So I can't really tell you anything about when that supply will be back online again similarly for bupivacaine. We don't want to get people overheated in expectations for what can be accomplished during launch year because it is a launch year, it’s a new products, it’s a new company, but we think that there will be some demand that will help us that there are a number of institutions that were very keen to see IV meloxicam implemented into their programs for pain management, multimodal analgesia because it gives them another tool work. It gives them another way to try to change the paradigm a bit, so that perhaps they can avoid for there opioid usage which they’re interested in because it helps them to be able to move patients out of the hospital more quickly, as well as controlling their pain. So I think all those factors will play a role but I wouldn't be saying fasten your seatbelts just yet on it but we think it will help us to achieve the goals that we have for ‘19 and even further for ‘20.
There are no further questions. I would like to turn the call back over to Gerri Henwood for any closing remarks.
Thank you, operator. Thank you all again for joining us here this morning. We look forward to talking with you again soon. Have a great day. Bye.
Ladies and gentleman, thank you for participating in today's conference. This does conclude the program and you may all disconnect. Everyone, have a great day.